Unified government and the value of cash holdings

Abstract

This study examines the impact of a government regime on cash holdings’ valuation, finding that the marginal value of an extra dollar of cash is 24–26 cents greater when the government is unified. As the degree of political conflicts and economic uncertainty are lower in this regime, greater cash reserves allow firms to alleviate under-investment problems and capture government-driven investment opportunities, leading to an increased marginal value of cash holdings. Taken together, our findings highlight that cash value hinges on the political regime in which firms operate.